CIRO says advisors who incorporate would be at advantage and able to pass along savings to clients.Matejay
The Canadian Investment Regulatory Organization (CIRO) is proposing rule changes that would allow investment advisors to incorporate as part of its goal to harmonize advisor compensation models across the industry.
Currently, CIRO rules permit only mutual fund-licensed advisors (except those in Alberta) to direct some of their compensation to a corporation under a “directed commission arrangement.”
In contrast, advisors working for investment dealers can be compensated only directly, either as employees or as agents.
In a bulletin published Thursday, CIRO proposed a new “incorporated advisor compensation” option that would be open to all “client-facing approved persons,” including mutual fund and investment advisors, portfolio managers and associate portfolio managers.
Advisors could remain directly compensated employees or agents of their dealers under the proposals.
CIRO is also proposing to phase out the directed commission arrangement option once the new incorporated advisor compensation option becomes available.
The self-regulatory organization (SRO) said there’s “a lack of tax certainty” with the directed commission option because of inconsistency in the approaches used to determine the portion of compensation directed to corporations.
Advisors currently incorporated under the directed commission arrangement may be able to transition to the new incorporated advisor option and continue to use their existing corporation, depending on how their direct commission arrangement is structured, said Ariel Visconti, senior corporate communications and public affairs specialist with CIRO, in a response sent by e-mail to questions from The Globe.
CIRO didn’t provide an implementation date for the new compensation model, indicating one would be determined closer to the date the rule amendments are approved.
If the Canadian Securities Administrators (CSA) approves the proposed amendments, implementing them would require changes to securities legislation and CSA registration rules, which “may require significant time,” CIRO said.
The SRO is consulting on the proposed rules until Nov. 6.
The proposals follow up on a position paper CIRO published in 2024 on harmonizing compensation models, a key priority the CSA set for the SRO. That paper included three potential approaches to advisor incorporation. The incorporated advisor compensation model proposed in Thursday’s bulletin is a combination of two of the approaches from the initial paper − the incorporated approved person and registered corporation approaches, Ms. Visconti said.
“This combined approach was proposed to ensure it was workable regardless of whether the CSA decided to exempt advisor-owned corporations from registration or to establish an advisor-owned corporation registration category,” she said.
CIRO said in Thursday’s bulletin that a harmonized compensation model would “promote greater investor access to regulated advice” by making it more financially viable to enter or stay in the investment advice profession.
Incorporating a business would allow investment advisors to realize tax savings. It would also recognize that the provision of investment advice is a profession, allowing advisors to be compensated as self-employed worker businesses separate from the business of their dealer.
The advisor incorporation option would also ensure that investor protection-related regulatory obligations owed to clients are maintained, CIRO indicated.
Investor protection was raised during consultations for the 2024 position paper, when investor advocacy group FAIR Canada flagged issues with the existing directed commission model.
Under Thursday’s proposals, qualified advisors who want to provide financial services from within a corporation would be restricted to regulated Canadian financial service activities and those ancillary to the services they perform on the dealer’s behalf.
Ownership of the advisor corporation would be restricted to the advisor, who could hold voting shares, and family member “related persons” holding only non-voting shares.
CIRO said advisors who wish to incorporate would need to register the corporation in CSA jurisdictions that require it and obtain CIRO approval, a process it estimates would take 12 to 18 months.
In its proposal, CIRO is seeking comments on specific questions related to allowable business activities within a corporation, ownership and control of an advisor corporation and the implementation process.
CIRO said it anticipates significant interest among advisors in using the new incorporated advisor compensation option if the CSA approves it.
Dealer members that choose not to offer the incorporated advisor option would likely face “a competitive disadvantage in the longer-term when trying to attract and retain advisors,” CIRO’s bulletin said.
Meanwhile, advisors who choose not to incorporate would face “some risk” of losing client business to advisors who incorporate and “are able to pass along savings to clients under this option.”